When a running business is taken over from a date prior to its incorporation/commencement, the profit earned up to the date of incorporation/commencement (incorporation, in case of private company; and commencement, in case of public company) is known as ‘Pre-incorporation profit’.

The same is to be treated as capital profit since these are profits which have been earned before the company came into existence. In short, the profit earned after the date of purchase of business is called ‘Post-incorporation or Post-acquisition profit’ and the profit earned before the date of purchase of business is termed as ‘Pre-incorporation profit’.

Thus, any profit/loss made before the incorporation is known as “Profit (Loss) Prior to Incorporation” which is treated as a capital profit and the same cannot be distributed as business profit. Hence, it cannot be distributed by way of dividend.

The same is to be transferred to Capital Reserve or may be adjusted against Goodwill. “Loss prior to incorporation” is treated as a capital loss and, hence, the same is shown under the head “Miscellaneous Expenditure” in the assets side of the Balance Sheet.

A Profit and Loss Account is prepared at the end of the year and thereafter the profits (or losses) between the two periods are allocated:

(i) From the date of purchase to the date of incorporation or pre-incorporation period;

(ii) From the date of incorporation to the closing of the accounting year or post-incorporation period.

The term contract is defined as an agreement two or more parties which has a binding nature, in essence, the agreement with legal enforceability is said to be a contract. It creates and defines the duties and obligations of the parties involved.

Agreement = Offer + Acceptance of offer Contract = Agreement + enforceability by law
Contract- An agreement between two or more parties which is enforceable
by law, is known as Contract.

That is if any two parties or more than two parties want to do something together
or exchange something for that purpose of they are entering into any agreement
which is enforceable by law, it is known as Contract.
A promise enforceable by law.

Essential Elements of contract

Agreement : The primary element that creates a contract between parties is an agreement, which is a result of offer and acceptance, that forms consideration for the parties concerned.

Free Consent: Consent of the parties is another important aspect of a contract, which means the parties entering into the contract, must agree upon the same thing in the same sense. The consent of the parties is said to be free when it is not influenced by corecieon undue influence, fraud, misrepresentation and mistake.

Competency: Competency refers to the capacity of the parties to enter into the contract, i.e. he/she has reached the age of maturity, he/she must be of sound mind, and he/she is not disqualified from contracting, as per the law like the alien enemy, foreign sovereigns, etc.

Consideration: It implies the price agreed to be paid for the promisor’s obligation by the promisee. It must be adequate and lawful.

Lawful object: The object for which the contract is created must be lawful, or else it is declared as void.

Not expressly declared as void: The law should not expressly declare the contract as void, such as contract in restraint of marriage, trade or legal proceedings.